American Eagle (AEO) Q3 Earnings in Line; Stock Plunges

American Eagle Outfitters, Inc. AEO posted in-line earnings and sales in the third-quarter fiscal 2016, wherein both metrics increased on a year-over-year basis. However, management’s muted earnings outlook for the fiscal fourth quarter instilled a negative sentiment among investors, leading this Zacks Rank #4 (Sell) stock to plunge 14% following the earnings release.

While American Eagle has gained 5.9% in the past six months, the company has clearly underperformed the Zacks-Categorized Retail–Apparel/Shoe industry, which has surged 16.4% over the same time frame.

Third-Quarter Highlights

Quarterly earnings of 41 cents per share increased 17.1% from 35 cents recorded in the prior-year quarter but were in line with the Zacks Consensus Estimate. Further, total revenue advanced 2.3% year over year to $940.6 million and almost came in line with the Zacks Consensus Estimate of $940.7 million.

Notably, the quarter witnessed record sales and achieved a double-digit earnings growth rate, in line with the company’s guidance. Results gained from the company’s constant efforts toward improvement in its digital business, product enhancement and commitment toward enriching consumer experience. Further, the company’s quarterly results benefited from continued strength in its American Eagle (“AE”) and aerie brands.

Gross profit in the quarter inched up 2.8% to $377.8 million, with the gross margin expanding 20 basis points (bps) to 40.2%. The upside was driven by improvement in IMU, but was somewhat offset by a marginal rise in markdowns. Further, buying, occupancy and warehousing expenses remained flat as a percentage of sales.

Selling, general and administrative (SG&A) expenses slipped 0.4% year over year to $220 million. The increase in investments due to advertising was partly mitigated by well-managed expenses. Moreover, as a percentage of sales, SG&A expenses declined 60 bps to 23.4%. Also, depreciation and amortization expenses rose 5.3% to $39.6 million due to the investments made in technology and omni-channel ventures.

The company’s operating income came in at $118.3 million, increasing 8.4% from $109.1 million recorded in the prior-year quarter. Operating margin expanded 70 bps to 12.6%.

Financial Position

American Eagle ended the fiscal third quarter with cash and cash equivalents of $291.7 million compared with $363.1 million in the prior-year quarter.

In the fiscal third quarter, the company incurred $47 million of capital expenditures, while it spent $108 million as capital expenditure year-to-date. Further, over the past year, American Eagle spent $152 million as capital expenditure. For fiscal 2016, management continues to anticipate nearly $160 million as capital expenditure, out of which roughly 50% will be spent on store openings and refurbishment. The balance will be invested in omni-channel and digital projects.

Additionally, the company paid $92 million as dividends over the past year.

As of Oct 29, 2016, American Eagle’s merchandise inventory was $492.6 million, up 2.7% from the comparable year-ago period. The company expects inventory at cost to increase in the high-single digits, with units anticipated to decline in the mid-single digits at the end of fourth-quarter fiscal 2016.

Store Update

During the fiscal third quarter, American Eagle inaugurated four new AE Brand stores, six Aerie stores and one Tailgate outlet (which was acquired at 2015 end), while it closed three AE stores. Alongside, the company opened eight international licensed stores, while shutting three down. . As of Oct 29, 2016, American Eagle operated 1,052 company stores and 163 international licensed outlets.

By the end of fiscal 2016, the company expects to operate 178 international licensed stores. Its total store count at the end of fiscal 2016 is expected in the range of 1,047−1,050. Further, the company remains on track to shut down nearly 25–30 underperforming outlets this year.

Guidance

Notably, this was the ninth straight quarter of improvement in the company’s profits. Going forward, management remains confident of performing well, as it entered the holiday season with a solid beginning with regard to market opportunities as well as the company’s robust execution. Also, management remains focused on enhancing consumer experience by providing top-quality products.

For the fiscal fourth quarter, the company anticipates comps growth in the band of flat to low single-digits. However, the company projects earnings per share in the band of 37–39 cents, which stands lower than the current Zacks Consensus Estimate of 45 cents.

For fourth-quarter fiscal 2016, the effective tax rate is expected to be nearly 35%.

Burlington Stores, a Zacks Rank #1 stock, has a long-term earnings growth rate of 17%. It has jumped 104.9% year to date.

Nordstrom, which carries a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 9.7%. The stock has gained roughly 46.6% in the past six months.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand.Click to see them now>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report